The provision of consumer credit is an old phenomenon. However, the ways in which credit is extended to consumers are changing rapidly given the pace of technology and consumer behavior. Buy Now Pay Later (BNPL) arrangements are a new consumer credit advance mechanism that allows consumers to pay for goods over time as they receive them as if payment had been made by advanced. In jurisdictions where BNPL has become widespread, such as Canada, the United Kingdom, and the United States of America, for example, BNPL is widely available as a payment option for goods ranging from phones and cars to most other consumer products. .
In recent times, BNPL deals have seen tremendous growth, recording global growth of nearly 400% between 2019 and 2021, and is expected to further increase by more than $480 billion between 2021 and 2026.
Although under a BNPL agreement, credit is functionally extended to the consumer, a BNPL agreement differs from other consumer finance agreements. Accordingly, this article seeks to explore the legal, structural and regulatory considerations of BNPL arrangements in Nigeria.
Consumer Credit Regulations in Nigeria
The different types of consumer credit -sale in installments, money lending, purchase in installments, credit cards, etc.- can be grouped into two categories, namely: loan credit and sales credit.
(i) Loan Credit: Loan credit refers to the extension or advance of money to or for someone, on the condition that it be repaid. Examples of loan credit include direct money loans and credit cards. Loan credit is the more regulated of the two categories of consumer credit and is regulated by:
a. the licensing regime under which the lender carries out the financing, for example, banking license; Y
b. the Laws of Lenders of the different states of the federation.
In particular, the two regulatory windows identified above bring significant regulation. For example, the Lender Laws of the different states contain similar provisions and require, among others:
a. obtain a Lender’s License to operate as a money lender, with notable exceptions such as banks, cooperative societies, insurance companies, etc.;
b. restrictions on the interest to be charged; Y
C. Disclosure Obligations Upon Request.
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Similarly, the Federal Competition and Consumer Protection Commission recently expressed its intention to regulate digital lending in Nigeria. Essentially, the nature of the loan credit agreement is such that in order to protect borrowers against the exploitative tendencies of lenders, it attracts significant regulation.
(ii) Sales Credit: By contrast, sales credit does not involve the initial extension of money; rather, an initial provision of goods or services with payment for those goods or services to be deferred. Examples of sales credit include installment sales and installment purchase agreements.
In particular, sales credit is largely unregulated, except for rent-to-own contracts regulated by the Rent to Buy Act of 1965. This scant regulation makes classifying a commercial agreement as sales credit difficult. very atractive.
BNPL can be defined as an agreement between a consumer, a financier and a merchant whereby: the consumer purchases and receives goods or services from the merchant; the financier pays the merchant for the consumer’s purchase; and the consumer must pay the purchase price over time.
Under the definition above, there are a myriad of structural possibilities, depending on business and legal considerations. It is important to highlight that, depending on the structural approach adopted, the BNPL agreement may constitute a loan credit or a sales credit, with the consequent regulatory implications.
Legal, structural and regulatory considerations of BNPL agreements
Below are some important considerations in structuring a BNPL deal in Nigeria and their implications on the deal’s potential classification:
(a) Deferred payments: A crucial ingredient of sales credit, in general, is that the merchant extends credit to the consumer through deferred payments. The terms of this arrangement are contained in a contract between the consumer and the merchant. In BNPL arrangements, the existence of a Deferred Payment Agreement (DPA) between the merchant and the consumer is an important indicator that the sales credit is being advanced.
(b) Avoidance of an agreement between the financier and the consumer: Unlike a trader, a financier advances money: the textbook definition of loan credit. Therefore, for BNPL agreements that are not intended to be regulated as loan credit, it is important to adopt a structure that avoids any agreement between the lender and the consumer to advance money.
Typically, a BNPL arrangement can accomplish this by ensuring that the financier’s contract is with the merchant, that is, the merchant assigns deferred payments to the financier, in exchange for upfront payment. Thereafter, the consumer may be required to set up an account on the online platform to facilitate, among other things, the collection and disclosure of information, communications and payments between the merchant, the consumer and the financier, which is regulated per the Platform Terms.
Essentially, the important question is: “Has the lender provided a loan to the consumer?” A BNPL agreement that seeks to avoid regulation as loan credit will ensure that it adopts a structure that ensures that this is answered in the negative.
(c) Immediate transfer of title to the consumer: Even within the categorization of sales credit, it is advisable that a BNPL agreement ensures categorization as sales credit simpliciter, rather than other types of sales credit such as installment purchase, which have legal and regulatory implications. considerable.
In particular, the immediate transfer of ownership of the goods to the consumer, instead of a future transfer of said title (as is the case with installment purchase contracts) is a foolproof mechanism to guarantee the classification as credit simpliciter of sale.
Several factors have been identified as driving the adoption and popularity of BNPL arrangements, some of them include improving sales for merchants, providing access to credit for the unbanked, and access to credit cheap/less risky for consumers.
Certainly, and like most start-ups, BNPL companies can gain a lot with minimal regulation. In BNPL deals, this can be accomplished by paying close attention to the structure, through the contracts that govern the deal, to navigate the legal and regulatory terrain and achieve a desirable categorization.